Trades to Take and Others to Avoid

When last we looked at Santos I left you with a little challenge to spot why I wouldn’t take an ABC short trade that was signalled on Tuesday 1 December. How did you go? It’s not too late to go and have a look now before you read on. The simple reason was that Point B, which occurred on 27 November, sat on the 50% level of a major range. To find this we look at the Weekly Chart, as follows.

As you can see, the March 2007 low was a significant low, coming at the end of a bear market that had lasted since February 2006. 50% or the half-way point between that low and the all-time high of 20.63 in June 2008 is 14.40. The low on 27 November came in slightly below that, at 14.27. It did close below the 50% level, but quickly rallied back above, showing support.

On the daily chart you can see that the 27 November low also fell just below the 50% level of the most recent range from 9 July to 31 August. It also reached the same level as 3 other lows in July and August.

It is worth noting for you more aggressive traders that Gann taught his students to reverse positions at points like this. In other words, if you were short going into 27 November you should take profits and go long at the market. For those who prefer to sleep at night there was a signal to go long using the Openers Rule on Monday 30th, when the market gapped back above both 50% levels on the Open and headed higher.

In any case the market was kind to the short traders, as the ABC short that was signalled on 1 December was not triggered. If you were waiting for a first higher swing bottom for a long entry you would have been keen on 3 December when an ABC long trade was signalled. However, it was not to be, although at least again the market was kind enough not to trigger the trade on the 4th.

Now we come to the interesting part. On 9 December the market retested the 27 November low. Would you look to go long here? Gann had a rule that when a market hits the same level a fourth time it almost always goes through rather than finding support. Strictly speaking the 27 November low was the fourth time at the same level, as there were 3 lows in July and August. However, the two lows in August were in consecutive weeks and would make one bottom on a weekly swing chart. In any case, whether you call this the 4th or 5th time at the same level, it’s time to be careful!

How to trade this? On 10 December, when the market fell strongly, breaking the previous day’s low and therefore all the levels of support, it was time to go short with a stop either above the high of the day or above the 50% level, which will now be resistance.

Since then we had the ubiquitous Christmas Rally into an early January top. The market obliged on 7 January by hitting 50% of the range from the 22 October high to the 14 December low and giving an outside reversal signal day.